WHOLESALE PRICE INDEX AND

INFLATION

Introduction

Price Index

It is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time

Wholesale Price Index

It is the price of a representative basket of wholesale goods.

Brief History

Firstly used in Great Britain in 1886

After this it was used in US in 1893

In INDIA it was used in 1942 for the first time

Inflation Inflation rate is the rate at which prices of goods and

services increase in its economy. Since it's practically impossible to find out the average change in prices of all the goods and services traded in an economy due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate.

If P0 is the current average price level and P − 1 is the price level a year ago, the rate of inflation during the year might be measured as follows:

Inflation Rate= P0 P-1/P-1 X 100%

Types Of Inflation

There are basically two main types of Inflation:

  Cost-push Inflation

Example: The oil crisis of the 1970s, wherein price increases of a key imported constituent impacted the prices of goods across industries.

Demand pull Inflation

Inflation

Reasons for selection of WPI as a measure of Inflation

There are many methods to calculate inflation like CPI(Consumer Price Index), COLI(Cost Of Living Indices), PPI(Producer Price Index) etc, but WPI is used because of the following characteristics:

Reasons for selection of WPI as a measure of Inflation

WPI uses a sample set of 435 commodities for inflation calculation

The price from wholesale market is taken for the calculation

WPI is available for every week It has a time lag of two weeks, which means WPI

of the week two weeks back will be available now. WPI is often seen as a comfortable tool to take

measure against price rise by the policy makers as it gives direction before the commodity actually hits the market

Inflation & WPI

Inflation & WPI

14

12

10

8

6

4

2

07/5/2008 8/5/2008 9/5/2008 10/5/2008 11/5/2008 12/5/2008 1/5/2009 2/5/2009 3/5/2009 4/5/2009 5/5/2009

Inflation (%)

Inflation & WPI

250

240

230

220

210

5/1/

2008

9/2/

2008

15/0

3/20

08

19/0

4/20

08

24/0

5/20

08

28/0

6/20

08

2/08

/200

8

6/09

/200

8

11/1

0/20

08

15/1

1/20

08

20/1

2/20

08

24/0

1/20

09

28/0

2/20

09

04/0

4/20

09

9/05

/200

9

All Commodity

Inflation & WPI260

255

230

220

250

5/1/

2008

9/2/

2008

15/0

3/20

08

19/0

4/20

08

24/0

5/20

08

28/0

6/20

08

2/08

/200

8

6/09

/200

8

11/1

0/20

08

15/1

1/20

08

20/1

2/20

08

24/0

1/20

09

28/0

2/20

09

04/0

4/20

09

9/05

/200

9

Primary Articles

245

240

235

225

Inflation & WPI385

375

325

315

365

5/1/

2008

9/2/

2008

15/0

3/20

08

19/0

4/20

08

24/0

5/20

08

28/0

6/20

08

2/08

/200

8

6/09

/200

8

11/1

0/20

08

15/1

1/20

08

20/1

2/20

08

24/0

1/20

09

28/0

2/20

09

04/0

4/20

09

9/05

/200

9

Fuel, Power, etc

355

345

335

Items Of WPI

Items Included in WPI

There are 435 items included in the WPI.○ Out of these 435 items, ‘primary articles’ (food

items and non-food items like jute etc) contributes 98 items, “fuel, power, light and lubricants” 19 items and “manufactured products” 318 items. Primary article has assigned a weight of 22.02 per cent, fuel, power, light and lubricants has been given weight of 14.23 per cent while manufactured products has been give a weight of highest 63.75 per cent.

Items Included in WPI

Pri-mary Arti-cles22%

Fuel, Power, Lieght14%

Manufactured Products

64%

Percentage

Calculation of WPI

Wholesale price index aggregation method is based on Laspeyres formula as below:

I= S (Ii x Wi) / S Wi

Where, I = Index numbers of wholesale prices of a sub-

group/group/ major group/all commodities

S = represents the summation operation,Ii = Index of the ith item / sub- group/ group/

major group.Wi = Weight assigned to the ith item of sub-

group/group/ major group.

Problems & Suggestions

Measuring B.P. using thermometer.

Erroneous method of calculating inflation.

Very old base

Not for mango man (aam aadmi)

Practically useless / sooo outdated

Have Saridon , Campa cola,Pagers,Dalda

Coco cola, Crocin, Refined oil, Mobiles are missing

PPI also includes taxes and transport charges

Service sector no share

Consumer Price Index

Four different types of C.P.I. In India.

Also covers poorest section of society

It shows what consumers are paying

Less closely tracked than W.P.I.

Less no. of items included

Released monthly not weekly

Too much lag in reporting it every month

Consumer Price Index

Views of N.S.C.

Views of Economists

Views of Mr. Finance minister

Ignorance of people

Urgent Action IS Needed

Pradeep Vikas Pradeep Manish Manish